February 6, 2018.

There’s little that can be said that hasn’t been said already. The Dow suffered its largest single day point loss ever, falling close to 1,200 points. At the session low, it was down by more than 1,500 points. The S&P 500, in turn, experienced its first 5% pullback in over a year. No sector remained unscathed, each sector on the S&P 500 ending lower; each of the 30 stocks on the blue-chip Dow, likewise ended lower. The market’s best fear gauge, the VIX, in its own right, soared 104%, hitting its highest trading level since August 2015. The S&P 500 had gone 406 sessions without a downtick of 5%, making it the longest such period in a 20 year span.

The sectors, though, didn’t fare equal fates. The financial sector was utterly clobbered, led lower by Wells Fargo (WFC). Five sectors on the S&P 500 each fell over 4%: industrials, health care, energy, telecom, and information technology. And boy, was it a bloodbath! There was nowhere – and we mean nowhere – to hide. Friday, it now seems in retrospect, had only gotten the ball rolling. Friday had capped off the largest weekly declines on the Dow and the S&P 500 in over 2 years. Interestingly enough, it could be said that it was good news that was the catalyst behind Friday’s losses; when the market learned of Friday’s strong employment report, the first thought was not the outstanding clip of economic growth – but rather whether the Fed would pick up its clip of rate hikes. Now, with bond yields rising, fear has penetrated that inflation could rear its head, meaning the Fed in response would have to raise rates, quelling borrowing and thus, placing a damper on capital investment and economic growth. All-in-all, a 10-year T-bond yield of 3% is considered something potentially crippling for the stock market.

The bond yield on the 10-year U.S., at one point in the day’s trading, climbed to as high as 2.883%, dropping thereafter to 2.72% with the bloodbath in equities causing players to seek out safe-haven assets. Bond prices and yields move in opposite direction. The dynamic here is critical, the more attractive bonds are, the less attractive stocks are. After Friday’s monthly job report showed a wage growth bounce, inflationary fears became all the more pronounced.

What happened yesterday, though, might not be strictly a result of bond yields. For one, a healthy correction like this has been a long time in coming. Secondly, the way algorithmic computerized programs work is that a breakdown of certain levels – perhaps arbitrarily – create automatic selling pressure. Yesterday, that was all the more palpable.

Fort Pitt Capital Group, senior analyst and portfolio manager, Kim Caughey Forrest, commented, “The panicky selloff and partial recovery was driven by algorithmic programs, because humans don’t make decisions that fast. It’s a mini flash crash.” Forrest added, “To be honest, we were getting uncomfortable by the relentless rally, so this market now seems a lot more normal.”

The selling, yesterday, accelerated in jagged fashion going into the close of trading. As mentioned above, automatic computerized trades were set to dump shares at certain level – for the Dow, once it fell below 25,000 and then 24,000 points, and on the S&P 500, once it fell beneath 2,700 points.

Charles Schwab VP of trading and derivatives, Randy Frederick, also shed positive light on yesterday’s pullback. “It doesn’t mean the bull market is over; it simply takes away some of the froth and irrational exuberance from stocks and puts us back on a more sustainable trendline.”

One of the most interesting stocks in yesterday’s trading was Wells Fargo (WFC). It plunged 9.2% after the bank shared that Fed sanctions over the scandals it had been ridden with could lower profits by $400 million this year. The stock was the biggest loser in the tech sector. The exceptional Fed move on the eve of Yellen’s departure put chills through Wells Fargo and its shareholders after the central bank limited the scope of the business Wells Fargo was allowed to engage in – in other words, lower revenue, fewer growth opportunities and lower profit.

Another stock commanding interest yesterday was Qualcomm which fell 6.6%, entirely wiping out premarket gains, after Broadcom (AVGO) made a “best and final offer” of $82 per share for the chipmaker. Broadcom, essentially, raised its bid price by 17%, though Qualcomm stockholders weren’t biting.

Teva (TEVA), the Israeli generic drug giant made headlines after informing Corcept Therapeutics that it was submitting an application for a generic version of the latter’s hyperglycemia drug. TEVA fell 4%, CORT toppling 26%.

On the cryptocurrency front, bitcoin, the world’s largest digital currency traded slightly above $7,000, down about half since its December high. It seems like our projection was right on the money; we warned about the extreme volatility in the cryptocurrency urging our traders repeatedly “buyer beware.” We can’t say enough that the typical market forces of supply and demand apply differently in the cryptocurrency market. A sudden short term shortage of bitcoins, or unforeseeable computer problems in cryptocurrency markets or a massive cryptocurrency theft can cause the “currency,” not backed by any government, to plummet suddenly – and also surge suddenly, but to gamble it all on odds not in the least in your control, and which constantly change from one day to the next, is not the discipline that we teach in tried and tested trading principles.

On the economic front, the HIS Markit Purchasing Managers Service Index fell to 53.3 points in January. Every reading above 50 signifies growth but the growth pace has tapered. Be primed for the JOLTS index at 10:00 today.


Daily change


Tuesday’s Hot Stocks: WFC, NOV, MAC, RE, CORT, AVGO

Have a great trading day!


Economic Calendar


DAYTIME (EST)EventForecastImpact
Monday9:45PMI Services Index53.3Medium
Monday10:00ISM Non-Mfg Index56.2Medium
Tuesday10:00JOLTS5.900 MHigh
Wednesday8:30William Dudley SpeaksMedium
Wednesday10:30Oil Inventories6.8 M barrelsLow
Thursday10:00Chain Store Sales  
Thursday8:30Jobless Claims235 KMedium
Friday8:30Wholesale Trade0.2 %Medium


New York Strategy Swing



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